Geithner Says Banks’ Stress-Test Results Will Be ‘Reassuring’

By Michael McKee

May 7 (Bloomberg) -- Treasury Secretary Timothy Geithner said none of the 19 banks subjected to government stress tests are insolvent, which should reassure investors and the public that the U.S. financial system is sound.

While some banks will need to raise more capital, there are a number of ways they can do that and most should be able to do it in the private sector, Geithner said yesterday in an interview with Charlie Rose.

“I think the results will be, on balance, reassuring,” Geithner said. “None of those 19 banks are at risk for insolvency.”

U.S. banks may outline their strategies for adding capital after the Federal Reserve publishes the stress-test results today. The Treasury secretary did not say how many of the 19 will need additional capital.

Geithner said those that do require more funds can raise new common equity from existing shareholders or new investors, convert preferred shares held by private investors or the government into common equity, sell additional assets or, failing that, apply for additional capital from the government.

Bank of America Corp. may need $34 billion, the largest requirement among the biggest banks subjected to the tests, said a person with knowledge of the matter. Citigroup Inc., Wells Fargo & Co. and GMAC LLC are also among the companies judged to need more capital.

Private Capital

Geithner, speaking in Washington, said he expects the “vast bulk” of banks will be able to raise needed capital “through private sources” instead of getting government financing.

“There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward,” Geithner said. “What we want to do is make sure that people have confidence that our financial system is going to be able to get through this and going to be able to lend.”

The government will take larger stakes in the banks, either by adding capital or converting preferred shares, “if necessary,” Geithner said, “but we’ll be reluctant to do that” and “we’ll get out as quickly as possible.”

He did not rule out forcing management changes at banks in which the government has a sizeable holding.

Corporate Boards

“We’ll have to make judgments about whether the quality of leadership of those boards is strong enough so that again our interests are met best,” Geithner said. “And our interests are not just as a shareholder, as an investor. We want to make sure the institutions will be strong enough so that we can get out, the private capital will come replace us over time.”

Geithner said he’d welcome banks that want to repay money the government provided through the $700 billion Troubled Asset Relief Program, adding that he expects more than $25 billion will be repaid in the next six to 12 months.

“I think we’ll get significantly more than that back,” Geithner said. “So we have a substantial amount of resources to backstop the system.”

Several banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co. have said they want to repay TARP funds immediately. If the stress test shows they have enough capital they will be allowed to do that, Geithner said, provided they can borrow in the market without using a Federal Deposit Insurance Corp. guarantee.

Although a big reason the banks want to repay the funds is to end government restrictions on their compensation practices, Geithner suggested the administration is still looking to set parameters for pay at financial institutions.

Excessive Pay

“We had a period where compensation packages just became completely unmoored from reality,” he said. “We’re not going to go back to that system.”

Bank supervisors and the Securities and Exchange Commission will set out “broad standards and principles” for compensation, Geithner said. While they won’t put limits on pay, government has to ensure compensation incentives “don’t create too much risk of excessive risk-taking in the future.”

Release of the stress tests will help the Treasury’s Public-Private Investment Program, designed to help remove bad assets from bank balance sheets by offering government loans to investors willing to purchase them, Geithner said.

Because banks will want to raise capital, “they’ll have strong incentive” to sell those assets at reasonable prices, Geithner said. The PPIP should be “up and running in the next four to six weeks.”

Recession

The biggest U.S. banks went through stress tests to see how they’d weather a broader downturn in a recession that started in December 2007.

The economy shrank at a 6.1 percent annual pace in the first three months of the year, after contracting 6.3 percent in the fourth quarter of 2008. About 5.1 million jobs have been lost since the recession began in December 2007, marking the biggest employment drop in any postwar economic slump.

Geithner said he sees “important signs of some stability” returning to the economy.

A private report yesterday showed companies in the U.S. cut an estimated 491,000 workers from payrolls in April, indicating the worst of the recession’s job losses may have passed. The drop in the ADP Employer Services gauge was smaller than economists forecast and the fewest since October.

“Things feel a little better; people sense a bit more stability and you can see it in behavior,” Geithner said, noting “sustained, day-by-day, week-by-week improvement in consumer and business confidence now for several weeks.”

‘Uncertainty’

Geithner tempered his optimism by saying there’s “a lot of pain across this country” and still “enormous uncertainty.” The nation’s unemployment rate, which reached a 25-year high of 8.5 percent in March, may still rise as the economy recovers.

“It’s not going to feel dramatically better for a while.”

Geithner called the Fed’s outlook for “slightly positive” growth in the second half of this year and an expansion that will “strengthen” next year a “good, independent, credible forecast.”

“The pace of decline is slowing, here and around the world,” Geithner said. “The main thing is a sense of stability.”

Geithner said the economy doesn’t need another stimulus package “at this stage, but that’s something we’ve got to keep an eye on carefully.” Governments have made mistakes in the past by removing extraordinary aid to growth before recovery fully takes hold, he said.

To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net.